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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

Commission file number: 001-32279

EAGLE HOSPITALITY PROPERTIES TRUST, INC.

(Exact name of registrant specified in its charter)

100 E. RiverCenter Blvd., Suite 480, Covington, KY

(Address of principal executive office)

41011

(Zip Code)

(859) 581-5900

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule 12b-2 of the Securities Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

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EAGLE HOSPITALITY PROPERTIES TRUST, INC.

QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2005

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PART I

Item 1. Financial Statements.

EAGLE HOSPITALITY PROPERTIES TRUST, INC.

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

($000’s omitted)

See notes to consolidated and combined financial statements

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EAGLE HOSPITALITY PROPERTIES TRUST, INC. AND PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(unaudited, 000’s omitted, except per share amounts)

See notes to consolidated and combined financial statements

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EAGLE HOSPITALITY PROPERTIES TRUST, INC. AND PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

(unaudited, 000’s omitted, except per share amounts)

See notes to consolidated and combined financial statements

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EAGLE HOSPITALITY PROPERTIES TRUST, INC.

CONSOLIDATED STATEMENT OF OWNERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

(unaudited, $000’s omitted)

See notes to consolidated and combined financial statements

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EAGLE HOSPITALITY PROPERTIES TRUST, INC.

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

Nine months ended September 30, 2005 and 2004 (unaudited)

($000’s omitted)

See notes to consolidated and combined financial statements

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EAGLE HOSPITALITY PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

September 30, 2005 (unaudited)

1. BACKGROUND

Eagle Hospitality Properties Trust, Inc., a Maryland corporation (together with its subsidiaries “Eagle”, “Company”, “We”, “Us” or “Our”), is a self-advised real estate investment trust (“REIT”) formed to pursue investment opportunities in the full-service and all-suites hotel industry. As of September 30, 2005, Eagle owned a 100% interest in eleven hotels and a 49% interest in one other hotel (Embassy Suites Hotel Cincinnati-RiverCenter).

Our operating partnership, EHP Operating Partnership, L.P. (“EHP OP” or the “operating partnership”), was organized as a limited partnership under the laws of the state of Maryland. Eagle is the sole general partner of and currently owns approximately 74% of the limited partnership units in EHP OP. Limited partners (including certain of our officers and directors) own the remaining operating partnership units. After one year, limited partners may generally redeem each unit for the cash value of one share of our common stock or, at our sole option, one share of common stock.

Formation and Significant Events

Eagle commenced its operations effective as of October 1, 2004 when it completed its initial public offering (“IPO”) and acquired a 100% interest in eight hotels and a 49% percent interest in one other hotel (Embassy Suites Hotel Cincinnati–RiverCenter), all of which were previously owned or controlled by Corporex Companies LLC (“Corporex” or “Predecessor”). Because we have the right and obligation to acquire the remaining 51% interest in the entity that owns the Embassy Suites Hotel Cincinnati-RiverCenter from William P. Butler, Eagle’s Chairman, no later than January 31, 2006 in exchange for 427,485 operating partnership units, the assets, liabilities and operations of such entity are included in our consolidated financial statements in accordance with the provisions in Financial Interpretation Number 46(R) (“FIN 46(R)”).

On February 24, 2005, Eagle purchased the Embassy Suites Phoenix-Scottsdale, for $32.2 million in cash.

On June 23, 2005, Eagle purchased the Hilton Glendale in Glendale, CA, for $80.1 million in cash.

On June 28, 2005, Eagle purchased the Embassy Suites San Juan Hotel and Casino in Isla Verde Carolina, Puerto Rico, for $59.8 million in cash.

Taxable REIT Subsidiaries

EHP TRS Holding Co., Inc. (“EHP TRS”), our taxable REIT subsidiary, was incorporated as a Maryland corporation. Each of our hotel properties, except the Embassy Suites San Juan Hotel, is leased to a wholly owned subsidiary of EHP TRS, which engages independent hotel management companies, such as Commonwealth Hotels, Inc. (“Commonwealth Hotels”), to manage and operate the hotels under management contracts. Lease revenue from EHP TRS and its wholly owned subsidiaries is eliminated in consolidation. Under applicable REIT tax rules, neither we nor our operating partnership can directly undertake the daily management activities of our hotels. Therefore, our principal source of funds will be dependent on EHP TRS’s ability to generate cash flow from the operation of the hotels. EHP TRS will pay income taxes at regular corporate rates on its taxable income. The Embassy Suites San Juan is leased to an unaffiliated lessee and the only income that we recognize in relation to this hotel is the lease income paid by the lessee.

2. BUSINESS COMBINATIONS

On February 24, 2005, we completed the acquisition of the 270-room Embassy Suites Phoenix-Scottsdale for $32.2 million. This acquisition was funded through a combination of cash and the proceeds from a $22.1 million three-year, full recourse loan having an interest rate of 215 basis points over 30-day LIBOR that is collateralized by the hotel. This hotel is managed by Commonwealth Hotels. The allocation of the purchase price is preliminary as the Company is awaiting additional information to finalize the allocation. The Company believes the final allocation of the purchase price will not be materially different from the preliminary allocation.

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On June 23, 2005, we completed the acquisition of the 351-room Hilton Glendale in Glendale California (“Hilton Glendale”) for $80.1 million. This acquisition was funded through a combination of cash and the proceeds from a $53.1 million bridge loan. The bridge loan was repaid on July 7, 2005 with the proceeds from a $53.1 million seven-year, interest only loan having a fixed interest rate of 5.21%. This hotel is managed by Hilton Hotels Corporation. The allocation of the purchase price is preliminary as the Company is awaiting additional information to finalize the allocation. The Company believes the final allocation of the purchase price will not be materially different from the preliminary allocation.

On June 28, 2005, we completed the acquisition of the 299-room Embassy Suites San Juan Hotel and Casino in Isla Verde Carolina, Puerto Rico for $59.8 million. This acquisition was funded with existing cash. This hotel is leased to a third party tenant who pays a monthly base rent of $450,000, plus additional rent based upon hotel revenues. This hotel is managed by Hilton Hotels Corporation. The allocation of the purchase price is preliminary as the Company is awaiting additional information to finalize the allocation. The Company believes the final allocation of the purchase price will not be materially different from the preliminary allocation.

The accompanying consolidated financial statements include the results of the acquired hotels since the dates of acquisition. The purchase prices were the result of arms’ length negotiations, and Eagle did not assign any value to goodwill or other intangible assets. However, the purchase price allocation is preliminary and subject to further internal review. Additional adjustments are unlikely to have a material impact.

The following pro forma selected financial data for Eagle and the Predecessor was derived in accordance with Statement of Financial Accounting Standards No. 141 (“FAS 141”). The selected financial data, in accordance with FAS 141, assumes that the acquisitions of the Embassy Suites Hotel Phoenix-Scottsdale, Hilton Glendale and Embassy Suites San Juan occurred on January 1, 2004, as opposed to the actual acquisition dates ($000s, except earnings per share):

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements presented herein include all of the accounts of Eagle beginning with its commencement of operations on October 1, 2004. Prior to that time, this report includes the combined financial statements of the Predecessor. Included in this consolidation are Eagle’s operating entities (“TRS”), the limited liability companies that own the hotel properties and EHP OP. In accordance with FIN 46(R), also included in the consolidation are all activities and balances relating to the Embassy Suites Hotel Cincinnati-RiverCenter in which Eagle owns a 49% interest. Under FIN 46(R), Eagle is deemed to be the primary beneficiary of this variable interest entity. Eagle is obligated to acquire the remaining 51% of this hotel property for 427,485 operating units no later than January 31, 2006. For the periods prior to Eagle’s ownership, the statements are presented on a combined basis as a result of common ownership and control. All significant intercompany accounts and transactions among the consolidated and combined entities have been eliminated in the consolidated and combined financial statements.

These financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Eagle believes that all adjustments, consisting of

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normal recurring adjustments and accruals, considered necessary for a fair presentation have been included. In addition, Eagle’s operations have historically been seasonal as certain properties experience higher occupancy rates during the different months of the year. This seasonality pattern can be expected to cause fluctuations in Eagle’s operating results. Consequently, operating results for the nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

Revenue Recognition — Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible. If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made. The lease income generated by the lease on the Embassy Suites San Juan is recognized as earned.

Investment in Hotel Properties — The initial nine hotel properties are stated at the Predecessor’s historical cost, plus an approximate $42.5 million minority interest partial step-up recorded upon formation of Eagle on October 1, 2004, related to the acquisition of minority interest from unaffiliated parties related to seven of the initial properties. Improvements and additions which extend the life of the property are capitalized and depreciated over the estimated useful life.

Impairment of Investment in Hotel Properties — Hotel properties are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable (i.e., the future undiscounted cash flows for the hotel are projected to be less than the net book value of the hotel). We test for impairment in several situations, including when current or projected cash flows are less than historical cash flows, when it becomes more likely than not that a hotel will be sold before the end of its previously estimated useful life, and when events or changes in circumstances indicate that a hotel’s net book value may not be recoverable. In the evaluation of the impairment of our hotels, we make many assumptions and estimates, including projected cash flows, holding period, expected useful life, future capital expenditures, and fair values, including consideration of capitalization rates, discount rates, and comparable selling prices. To date, no such impairment charges have been recognized. If an asset were deemed to be impaired, we would record an impairment charge for the amount the property’s net book value exceeds its fair value.

Stock-Based Compensation — Eagle accounts for stock-based compensation using the intrinsic-value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” In connection with Eagle’s formation, Eagle established the 2004 Long-Term Incentive Plan (the “LTIP”). Upon consummation of the IPO and subsequent exercise of the underwriters’ over-allotment, Eagle issued a total of 441,200 shares of unvested restricted stock to its executives, directors, and certain employees of Eagle, the Predecessor and its affiliates, which includes 208,332 shares of common stock issued to Corporex under our strategic alliance agreement. An additional 26,715 shares of restricted stock have been issued under the LTIP in 2005. 21,683 have been canceled due to employee resignations. Of the 446,232 shares issued, 208,731 vest over five years and 237,501 vest over one year. Such shares are charged to compensation expense on a straight-line basis over the vesting period based upon the market price at the time of issuance. Eagle recognized compensation expense of approximately $2.0 million related to these restricted shares during the nine month period ended September 30, 2005. Under the LTIP, Eagle may issue a variety of performance-based stock awards, including nonqualified stock options. At September 30, 2005, Eagle had approximately 550,000 remaining shares available for future issuance under the LTIP.

The LTIP was adopted by the board of directors and approved by Eagle’s stockholders prior to the initial public offering. The purpose of the incentive plan is to promote Eagle’s success and enhance the value of Eagle’s common stock by linking the personal interests of participants to those of the stockholders, and by providing such persons with an incentive to achieve outstanding performance.

The incentive plan authorizes the governance and compensation committee and Eagle’s board of directors to grant awards to employees, officers, consultants (including, but not limited to, Corporex and its employees) and directors.

A table depicting the pro forma adjustments relating to the adoption of FAS 123(R) is not presented as there is no material impact expected to occur as a result of the adoption of this policy.

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Segments — Eagle presently operates in one business segment within the hotel lodging industry: direct hotel investments. Direct hotel investments refers to owning hotels through either acquisition or new development. The Predecessor also only operated within the direct hotel investments segment.

4. PREFERRED STOCK OFFERING

On June 13, 2005, the Company closed an underwritten public offering of 4,000,000 shares of its 8.25% Series A Cumulative Redeemable Preferred Stock (“Preferred Shares”). The Preferred Shares have a liquidation value of $25.00 per share and will be redeemable at the option of the Company on or after June 14, 2010. The annual distribution for the Preferred Shares will be $2.0625 per share. Dividends on the Preferred Shares will be payable quarterly in arrears on the last calendar day of March, June, September and December.

The net proceeds of the public offering of the Preferred Shares were $96.5 million, after underwriters discounts and other offering expenses. The proceeds were used in the acquisitions of the Hilton Glendale and the Embassy Suites San Juan, as well as for other general corporate and working capital purposes.

5. EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of common shares outstanding during the period whereas diluted earnings per share adjusts the weighted average shares outstanding for the effect of all dilutive securities. For the three month and nine month periods ended September 30, 2005 the weighted average basic and diluted common shares outstanding were as follows (000s):

6. MINORITY INTEREST

Minority interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership. Net income (loss) is allocated to minority interest based on the weighted average limited partnership percentage ownership throughout the period. Upon formation of Eagle on October 1, 2004, Eagle issued 5,566,352 units of limited partnership interest to affiliates, plus another 427,485 partnership units are to be issued no later than January 31, 2006 in exchange for the remaining 51% of the Embassy Suites Hotel Cincinnati–RiverCenter. This total of 5,993,837 of partnership units represents an approximate minority interest ownership of 26%. Beginning October 1, 2005, each unit of limited partnership interest, excluding the 427,485 unissued partnership units relating to the Embassy Suites Hotel Cincinnati–RiverCenter, may be redeemed for the cash value of one share of our common stock or, at our sole option, one share of common stock.

Upon its formation, Eagle acquired the Embassy Suites Hotel Denver International Airport pursuant to the terms and conditions of the original contribution agreement Eagle entered with the former owners of that hotel. The contribution agreement includes an earn-out provision requiring Eagle to issue an additional 250,000 operating partnership units to the former owners if EBITDA at that hotel exceeds $2,815,459 for any 12-month trailing period prior to October 2007. During the 12-month period ended September 30, 2005, the Embassy Suites Hotel Denver International Airport reached the earn-out threshold; therefore, the former owners of that hotel will be issued an additional 250,000 operating partnership units during the fourth quarter of 2005 in accordance with the original contribution agreement.

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7. DEBT

Eagle’s mortgage notes payable as of September 30, 2005 are as follows:

Total debt maturities, including capital lease obligations, as of September 30, 2005 were as follows ($000s):

8. RELATED PARTY TRANSACTIONS

Hotel Management Agreements - Nine of our hotels are subject to management agreements with Commonwealth Hotels. Under these agreements, Eagle is obligated to pay monthly management fees equal to 2.50% of gross revenues in 2005, 2.75% in 2006, and 3.00% of gross revenues in 2007 and the years thereafter. Incentive fees may also be earned upon meeting certain net operating income thresholds. These management agreements have ten-year terms, with a renewal option for one additional five-year period. If Eagle terminates a management agreement on any of the properties prior to its expiration, due to sale of the property, Eagle may be required to pay a substantial termination fee. Eagle’s Chairman is the majority shareholder in Commonwealth Hotels. Management fees earned by Commonwealth Hotels for the three months and nine months, respectively, ending September 30, 2005 were $1.0 million and $2.3 million. The management fees expensed by the Predecessor for the three months and nine months, respectively, ending September 30, 2004 were $0.7 million and $1.8 million. At September 30, 2005 and December 31, 2004, Eagle owed Commonwealth Hotels $0.2 and $0.3 million in management fees payable, respectively.

Purchase Price Adjustment – As of September 30, 2005, Eagle has a payable of $0.4 million to the former owners of the original eight hotels and the 49% interest in the Embassy Suites Hotel Cincinnati-RiverCenter acquired from Corporex, effective October 1, 2004. This payable relates to a contractually required “true-up” for real estate taxes for the acquired hotels. Our Chairman of the Board, William P. Butler, and two members of our Board of Directors, Thomas E. Banta and Thomas E. Costello, will receive their proportionate share of these payments relative to their interest in the selling entities.

Strategic Alliance Agreement – Eagle has entered into a Strategic Alliance Agreement (“SAA”) with Corporex and affiliated parties. The SAA provides Eagle with the right of first refusal for development opportunities with Corporex and affiliates, as well as a non-compete clause for markets in which we own or have an investment. The agreement expires October 1, 2014. Corporex received 208,332 shares of common stock in conjunction with the SAA. The shares vest October 1, 2005. In the period ending September 30, 2005, Eagle incurred approximately $1.5 million in expense as a result of the amortization of these shares.

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Related Party Debt – As of December 31, 2004, Eagle had a loan from Corporex, secured by the Embassy Suites Hotel Cleveland/Rockside, with a balance of $23.4 million (the “Corporex Loan”). On February 18, 2005, Eagle obtained an $81.8 million secured loan from the Prudential Insurance Company of America (the “Prudential Loan”). Eagle used part of the proceeds from the Prudential Loan to retire the $23.4 million Corporex Loan. In connection with the Corporex Loan, Eagle incurred interest expense for the related party debt of $0.2 million for the nine month period ending September 30, 2005. The Predecessor incurred interest expense for related party debt of $0.3 million and $0.7 million for the three months and nine months, respectively, ending September 30, 2004.

Transition Services – From October 1, 2004 through December 31, 2005, Eagle has agreed to make its Chief Executive Officer, Mr. Blackham, available to provide certain consulting and advisory transition services to Corporex in areas unrelated to our core business. Eagle is compensated $10,000 per month for providing these services. In the three month and nine month periods ending September 30, 2005, Eagle earned $30,000 and $90,000, respectively, related to this agreement.

Leased Office Space - Eagle’s headquarters are located in an office building that is owned by a limited partnership in which Eagle’s Chairman and Chief Executive Officer are limited partners. We entered into a lease for this office space subsequent to our IPO at terms approximating the fair market value. We are obligated to pay $0.6 million in rent over a ten-year period, or on average, approximately $5,000 per month. The expense of this lease is being recognized on a straight-line basis. In addition to the rent payments, we will also be subject to a common area maintenance fee allocation related to this office space. Eagle believes the lease payments do not exceed market value.

9. STATEMENT OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES

On January 10, 2005, our Board of Directors declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on February 1, 2005 to holders of record as of January 18, 2005. The total amount of the dividends and distributions paid to holders of our common stock and operating partnership units was $4.1 million.

On February 18, 2005, we finalized an $81.8 million five-year, non-recourse loan with Prudential. This loan involves both a fixed-rate and floating-rate component with $58.0 million fixed at an interest rate of 5.43% and the remainder having a variable interest rate of 175 basis points over 30-day LIBOR. Approximately $68 million of the proceeds were used to paydown $4.0 million of the loan for the Embassy Suites Columbus/Dublin and to retire the loans for the Cincinnati Landmark Marriott, the Embassy Suites Hotel Cleveland/Rockside (related party loan from Corporex) and the Embassy Suites Hotel Denver-International Airport. This loan is subject to certain financial covenants and is collateralized by the Cincinnati Landmark Marriott, the Embassy Suites Hotel Cleveland/Rockside, and the Embassy Suites Hotel Tampa-Airport/Westshore.

On March 31, 2005, Eagle declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on April 14, 2005, to holders of record as of April 6, 2005. The total amount of the dividends paid to holders of our common stock was $3.0 million and $1.1 million was paid to holders of operating partnership units.

On June 17, 2005, Eagle declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on July 15, 2005, to holders of record as of June 30, 2005. The total amount of the dividends paid to holders of our common stock was $3.0 million and $1.1 million was paid to holders of operating partnership units.

On June 17, 2005, Eagle declared a prorated quarterly dividend of $0.103125 per 8.25% Series A Cumulative Redeemable Preferred Share for the period from June 13, 2005 to June 30, 2005 to holders of record as of June 20, 2005. The total amount of dividends paid to holders of the preferred shares was $0.4 million and was paid on June 30, 2005.

On September 7, 2005, Eagle closed a $38.2 million seven-year loan with Wachovia Bank. This loan has a fixed rate of 5.14% and is interest-only for the first thirty months. This loan is secured by the 299-room Embassy Suites Hotel & Casino San Juan in San Juan, Puerto Rico. The proceeds from this loan were used to repay the loans collateralized by the Embassy Suites Hotel Columbus/Dublin and the Embassy Suites Hotel Phoenix-Scottsdale.

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On September 9, 2005, Eagle declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on October 17, 2005, to holders of record as of September 30, 2005. The total amount of the dividends paid to holders of our common stock was $3.0 million and $1.1 million was paid to holders of operating partnership units. This dividend is shown as “Dividends and distributions payable” on the September 30, 2005 Balance Sheet. During the nine month period ended September 30, 2004, the Predecessor paid $1.0 million in partner distributions.

On September 9, 2005, Eagle declared a quarterly dividend of $0.515625 per 8.25% Series A Cumulative Redeemable Preferred Share for the period ended September 30, 2005 to holders of record as of September 20, 2005. The total amount of dividends paid to holders of the preferred shares was $2.1 million and was paid on September 30, 2005.

On October 3, 2005, Eagle closed on a $26.0 million ninety-day, bridge facility with US Bank at a variable rate of 30-day LIBOR plus 2.25%. This loan is secured by the Embassy Suites Hotel Phoenix-Scottsdale and the Embassy Suites Hotel Cincinnati-RiverCenter. $21.8 million of this bridge facility was used to pay off the loans on the Embassy Suites Hotel Cincinnati-RiverCenter and the Chicago Marriott Southwest at Burr Ridge. As of the date of this filing, we have approximately $4.2 million of remaining availability under this facility. It is the intent of the Company to secure permanent financing to replace this bridge loan; however, we cannot assure you that we will be able to obtain such financing on favorable terms, if at all.

Interest paid by Eagle during the three months and nine months, respectively, ended September 30, 2005 was $2.8 million and $7.1 million. Interest paid by the Predecessor during the three months and nine months, respectively, ended September 30, 2004 was $3.0 million and $8.8 million.

During the nine months ended September 30, 2005, Eagle granted approximately 27,000 shares of restricted stock, valued at approximately $0.3 million, under its LTIP and cancelled approximately 22,000 shares of restricted stock due to the employee resignations, valued at $0.2 million.

10. INCOME TAXES

The Company had an income tax benefit of $0.7 million for nine months ending September 30, 2005 and income tax benefit of $2.2 million for the nine months ending September 30, 2005.

The Company intends to elect to be taxed as a REIT under the Internal Revenue Code. As long as we maintain our status as a REIT, we generally will not be subject to federal or state income taxes on our net income to the extent we distribute our net income to our stockholders. However, we will be subject to tax at normal corporate rates on net income or capital gains not distributed to stockholders, and we may be subject to state income and franchise taxes. However, our TRS is subject to federal and state income and franchise taxation on its taxable income.

The components of the corresponding income tax expense and benefit were as follows ($000s):

At December 31, 2004, the Company fully reserved the net deferred tax asset of approximately $0.4 million due to the limited operational history of the Company. However, with the acquisitions and updated tax planning forecast, the Company now believes this valuation unnecessary with the expectation that this asset will be realizable within the next few years. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.

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11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for the Company in the first annual reporting period beginning after June 15, 2005. Adoption is not expected to have a material effect on the Company.

12. COMMITMENTS AND CONTINGENCIES

Restricted Cash — Under certain existing mortgage loan agreements, Eagle is obligated to escrow payments for insurance, real estate taxes and 4% of gross revenue of certain properties for capital improvements.

Contingent Consideration — At the time we acquired our initial hotels, we agreed to make earn-out payments totaling in the aggregate up to 833,333 additional operating partnership units, which may be payable to the original contributors of the Embassy Suites Hotel Columbus/Dublin, the Embassy Suites Hotel Cleveland/Rockside and the Embassy Suites Hotel Denver-International Airport only if certain operating measurements are achieved on any trailing 12-month basis within three years from the contribution. For the 12-month period ended September 30, 2005, the Embassy Suites Hotel Denver-International Airport exceeded the operating measurements required to receive the additional 250,000 operating partnership units pursuant to the earn-out provisions of the original contribution agreement. These operating partnership units will be issued to the former owners of that hotel during the fourth quarter of 2005.

Franchise Fees — All of our hotels, except the Hyatt Regency Rochester, operate under franchise agreements. In conjunction with these franchise agreements, Eagle is obligated to pay the franchisors royalty fees between 4% and 6% of gross room revenue, and under certain agreements, fees for marketing, reservations, and other related activities aggregating between 1% and 4% of gross room revenue. In addition, the Marriott hotels are obligated to pay between 2% and 3% for food and beverage revenues. Franchise fees are included in hotel expenses in the accompanying consolidated and combined statements of operations.

Litigation — We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.

Taxes — Under tax indemnification agreements with the contributors of certain initial hotels, Eagle has agreed to provide tax indemnification, which would range between $45 million and $75 million, to the original contributors against certain tax consequences of a sale. We have agreed to pay the contributor’s tax liability with respect to gain allocated to the contributor under Section 704(C) of the Internal Revenue Code if we dispose of a property contributed by the contributor in a taxable transaction during a “protected period”, which continues until the earlier of: a) October 1, 2014, or b) the date on which the contributor no longer owns, in the aggregate, at least 25% of the units we issued to the contributor at the time of its contribution of property to our operating partnership.

13. COMPREHENSIVE INCOME

For the three months and nine months, respectively, ended September 30, 2005, comprehensive income was $0.2 million and $2.6 million. As of September 30, 2005 and December 31, 2004, Eagle’s accumulated other comprehensive income was $15,000 and $22,000, respectively. The change in accumulated other comprehensive income was entirely due to Eagle’s unrealized gains on its marketable securities.

14. SUBSEQUENT EVENTS

On October 3, 2005, Eagle closed on a $26.0 million ninety-day, bridge facility with US Bank at a variable rate of 30-day LIBOR plus 2.25%. This loan is secured by the Embassy Suites Hotel Phoenix-Scottsdale and the Embassy Suites Hotel Cincinnati-RiverCenter. $21.8 million of this bridge facility was drawn used to pay off the loans on the Embassy Suites Hotel Cincinnati-RiverCenter and the Chicago Marriott Southwest at Burr Ridge. As

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of the date of this filing, we have approximately $4.2 million of remaining availability under this facility. It is the intent of the Company to secure permanent financing to replace this bridge facility; however, we cannot assure you that we will be able to obtain such financing on favorable terms, if at all.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

We make forward-looking statements throughout this Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans, and objectives. Statements regarding the following subjects are forward-looking by their nature:

The forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions, and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider this risk when you make an investment decision concerning our common stock. Additionally, the following factors could cause actual results to vary from our forward-looking statements:

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When we use the words “will likely result,” “may,” “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” or similar expressions, we intend to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

RESULTS OF OPERATIONS

OVERVIEW

Eagle Hospitality Properties Trust, Inc., a Maryland corporation (together with its subsidiaries “Eagle” or “Company”), is a self-advised real estate investment trust (“REIT”) formed to pursue investment opportunities in the full-service and all-suites hotel industry. As of September 30, 2005, Eagle owned a 100% interest in 11 hotels and a 49% interest in one other hotel (Embassy Suites Hotel Cincinnati-RiverCenter).

THIRD QUARTER AND YEAR TO DATE HIGHLIGHTS AND OUTLOOK FOR THE REMAINDER OF 2005

Refer to the “Results of Operations” section below for discussion of our three months and nine months ended September 30, 2005 results compared to the results for the same periods of 2004.

In the hotel industry most categories of operating costs do not vary directly with the volume of sales, the exceptions being franchise, management, credit card fees and the costs of the food and beverages served. Because of this operating leverage, changes in sales volume disproportionately impact operating results. Room revenue is the most important category of revenue and drives other revenue categories such as food and beverage and telephone. There are three key performance indicators used in the hotel industry to measure room sales:

During the quarter, due to a strengthening economy and the maturation of certain of our hotels, our portfolio saw RevPAR increase by 6.1%, from $80.29 for the third quarter of 2004 to $85.16 for the third quarter of 2005 for the nine hotels that were owned by Eagle during the third quarter of 2004. For the nine month period ending September 30, 2005, our portfolio saw RevPAR increase by 7.1%, to $79.77 from $74.46 for the same period in 2004 for those nine hotels. This increase was the result of increases in both the occupancy percentage and room rates.

On January 10, 2005, our Board of Directors declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on February 1, 2005 to holders of record as of January 18, 2005. The total amount of the dividends and distributions paid to holders of our common stock and operating partnership units was $4.1 million.

On February 18, 2005, we finalized an $81.8 million five-year, non-recourse loan with Prudential. This loan involves both a fixed-rate and floating-rate component with $58.0 million fixed at an interest rate of 5.43% and the remainder having a variable interest rate of 175 basis points over 30-day LIBOR. Approximately $68 million of the proceeds were used to paydown $4.0 million of the loan for the Embassy Suites Columbus/Dublin and to retire the loans for the Cincinnati Landmark Marriott, the Embassy Suites Hotel Cleveland/Rockside (related party loan from Corporex) and the Embassy Suites Hotel Denver-International Airport. This loan is subject to certain financial covenants and is collateralized by the Cincinnati Landmark Marriott, the Embassy Suites Hotel Cleveland/Rockside, and the Embassy Suites Hotel Tampa-Airport/Westshore.

On February 24, 2005, we completed the acquisition of the 270-room Embassy Suites Hotel Phoenix-Scottsdale for $32.2 million in cash. In connection with this acquisition, Eagle finalized a $22.1 million three year, full recourse

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loan having an interest rate of 215 basis points over 30-day LIBOR that is collateralized by the hotel. The proceeds of this loan were used to pay for this acquisition and the remainder of the purchase price was paid from existing cash. This hotel is managed by Commonwealth Hotels. The allocation of the purchase price is preliminary as the Company is awaiting additional information to finalize the allocation. The Company believes the final allocation of the purchase price will not be materially different from the preliminary allocation.

On March 31, 2005, our Board of Directors declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on April 14, 2005 to holders of record as of April 6, 2005. The total amount of the dividends and distributions paid to holders of our common stock and operating partnership units was $4.1 million.

On June 13, 2005, the Company closed an underwritten public offering of 4,000,000 shares of its 8.25% Series A Cumulative Redeemable Preferred Stock (“Preferred Shares”). The Preferred Shares have a liquidation value of $25.00 and will be redeemable at the option of the Company on or after June 14, 2010. The annual distribution for the Preferred Shares will be $2.0625 per share. Dividends on the Preferred Shares will be payable quarterly in arrears on the last calendar day of March, June, September and December.

The net proceeds of the public offering of the Preferred Shares were $96.5 million, after underwriters discounts and other offering expenses. The proceeds were used in the acquisitions of the Hilton Glendale and the Embassy Suites Hotel San Juan, as well as for other general corporate and working capital purposes.

On June 17, 2005, our Board of Directors declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on July 15, 2005 to holders of record as of June 30, 2005. The total amount of the dividends and distributions paid to holders of our common stock and operating partnership units was $4.1 million.

On June 17, 2005, Eagle declared a prorated quarterly dividend of $0.103125 per 8.25% Series A Cumulative Redeemable Preferred Share for the period from June 13, 2005 to June 30, 2005 to holders of record as of June 20, 2005. The total amount of dividends paid to holders of the preferred shares was $0.4 million and was paid on June 30, 2005.

On June 23, 2005, we completed the acquisition of the 351-room Hilton Glendale in Glendale, California for $80.1 million. This acquisition was funded through a combination of cash and the proceeds from a $53.1 million bridge loan. The bridge loan was repaid on July 8, 2005 with the proceeds from a $53.1 million seven-year, interest only loan having a fixed interest rate of 5.21%. This hotel is managed by Hilton Hotels Corporation. The allocation of the purchase price is preliminary as the Company is awaiting additional information to finalize the allocation. The Company believes the final allocation of the purchase price will not be materially different from the preliminary allocation.

On June 27, 2005, we closed on a bridge loan secured by the Hilton Glendale. This bridge loan was repaid on July 7, 2005, with the proceeds from a $53.1 million seven-year, interest only loan having a fixed interest rate of 5.21%.

On June 28, 2005, we completed the acquisition of the 299-room Embassy Suites San Juan Hotel and Casino in Isla Verde Carolina, Puerto Rico for $59.8 million. This acquisition was funded with existing cash. This hotel is leased to a third party tenant who pays a monthly base rent of $450,000, plus additional rent based upon hotel revenues. This hotel is managed by Hilton Hotels Corporation. The allocation of the purchase price is preliminary as the Company is awaiting additional information to finalize the allocation. The Company believes the final allocation of the purchase price will not be materially different from the preliminary allocation.

On July 8, 2005, Eagle closed a $53.1 million seven-year, interest only loan with KeyBank at a fixed rate of 5.21%. This loan is secured by the 351-room Hilton Glendale in Glendale, California. The proceeds from this loan were used to repay the $53.1 million bridge loan.

On July 25, 2005, Eagle announced that the Audit Committee of the Board of Directors had selected Ernst & Young LLP as the Company’s independent registered public accounting firm, commencing with its fiscal quarter ending June 30, 2005. The Company emphasized that the change was not the result of any disagreements or dissatisfaction with the work of its former outside audit firm, Grant Thornton LLP.

On September 7, 2005, Eagle closed a $38.2 million seven-year loan with Wachovia Bank. This loan has a fixed rate of 5.14% and is interest-only for the first thirty months. This loan is secured by the 299-room Embassy Suites Hotel & Casino San Juan in San Juan, Puerto Rico. The proceeds from this loan were used to repay the loans collateralized by the Embassy Suites Hotel Columbus/Dublin and the Embassy Suites Hotel Phoenix-Scottsdale.

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On September 9, 2005, Eagle declared a dividend of $0.175 per common share and operating partnership unit. This dividend was paid on October 17, 2005, to holders of record as of September 30, 2005. The total amount of the dividends paid to holders of our common stock was $3.0 million and $1.1 million was paid to holders of operating partnership units.

On September 9, 2005, Eagle declared a quarterly dividend of $0.515625 per 8.25% Series A Cumulative Redeemable Preferred Share for the period ended September 30, 2005 to holders of record as of September 20, 2005. The total amount of dividends paid to holders of the preferred shares was $2.1 million and was paid on September 30, 2005.

On October 3, 2005, Eagle closed on a $26.0 million ninety-day, bridge facility with US Bank at a variable rate of 30-day LIBOR plus 2.25%. This loan is secured by the Embassy Suites Hotel Phoenix-Scottsdale and the Embassy Suites Hotel Cincinnati-RiverCenter. $21.8 million of this bridge facility was used to pay off the loans on the Embassy Suites Hotel Cincinnati-RiverCenter and the Chicago Marriott Southwest at Burr Ridge. As of the date of this filing, we have approximately $4.2 million of remaining availability under this facility. It is the intent of the Company to secure permanent financing to replace this bridge loan; however, we cannot assure you that we will be able to obtain such financing on favorable terms, if at all.

The outlook for the remainder of 2005 is uncertain; however, management is currently optimistic the fourth quarter of 2005 will show increases in revenues and net income, for the following reasons:

This foregoing forward-looking statement is subject to risks and uncertainties. For more information, see the introductory paragraphs of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located on page 15.

CRITICAL ACCOUNTING POLICIES

There were no changes to the critical accounting policies and estimates made by management in the three months ended September 30, 2005. For a more detailed description of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in our 2004 Annual Report on Form 10-K.

FINANCIAL CONDITION

September 30, 2005 Compared to December 31, 2004

Total mortgage debt increased $80.2 million from $130.7 million (including $23.4 million of related-party mortgage debt) to $210.9 million, or 61.4%, as a result of the $38.2 million loan for the Embassy Suites Hotel & Casino San Juan (“Embassy Suites San Juan”), the $81.8 million Prudential Loan and the $53.1 million loan related to the acquisition of the Hilton Glendale. The proceeds of the Embassy Suites San Juan loan were used to payoff the mortgage debt related to the Embassy Suites Hotel Phoenix/Scottsdale and the Embassy Suites Hotel Columbus/Dublin. The proceeds of the Prudential Loan were used to pay down approximately $71 million of existing mortgage debt (including all of the related-party mortgage debt) and to provide cash towards the completion of the acquisition of the Embassy Suites Hotel Phoenix/Scottsdale.

Total assets increased $176.3 million, largely the result of the hotel acquisitions.

The unrestricted cash balance decreased $2.2 million from December 31, 2004. This decrease is the result of dividends and distributions paid to the preferred and common shareholders, hotel capital expenditures, debt payoffs and hotel acquisitions offset by net proceeds of $96.5 million from the preferred offering, proceeds from the new mortgages and cash generated from hotel operations. In total, $14.8 million in dividends and distributions paid were paid in the first nine months of 2005. Also, $11.4 million was used to fund capital improvements at our hotels.

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RESULTS OF OPERATIONS

Quarter Ended September 30, 2005 Compared to Quarter Ended September 30, 2004

Revenue. Total revenues increased $11.2 million, or 50.9%, from $22.0 million in the third quarter of 2004 to $33.2 million in the third quarter of 2005. $10.1 million of the increase was related to the Chicago Marriott Southwest at Burr Ridge, which opened in August 2004, and the hotels acquired in 2005. In addition, the Hilton Cincinnati Airport showed a revenue increase of $0.5 million in the third quarter of 2005 over the comparable period in 2004. The increase at this hotel is largely attributable to the airline and corporate group business. While there has been significant improvement in rate, the main driver for the increase at this property has been occupancy.

For the nine hotels owned during the third quarter of 2004, RevPAR increased from $80.29 to $85.16 for the third quarter of 2005, or 6.1%. Aside from the Chicago Marriott Southwest at Burr Ridge, which opened in August 2004, the largest RevPAR increases occurred at the Hilton Cincinnati Airport (29.6%), the Embassy Suites Hotel Denver International Airport (9.4%) and the Hyatt Regency Rochester (8.1%).

Operating Expenses. Total operating expenses increased by $10.6 million, from $18.0 million during the third quarter of 2004, to $28.6 million in the third quarter of 2005, or 58.9%. Of this increase, $7.6 million was related to the Chicago Marriott Southwest at Burr Ridge, which did not open until August 2004, and the other hotels acquired in 2005. $1.3 million was related to corporate expense in the third quarter of 2005 (the Predecessor did not have a parent-type function) and $0.7 million related to the amortization of stock-based compensation. There was $0.2 million in bad debt expense incurred during the period relating to the Chapter 11 filings of Delta Airlines and Northwest Airlines. The remainder of the increase was largely due to items that vary directly with an increase in revenues, such as franchise, management and credit card fees.

Operating Income. Net operating income increased by $0.6 million to $4.6 million in third quarter of 2005 from $4.0 million during the third quarter of 2004. The increase of 15.0% was the result of $2.5 million of net operating income generated by the 2005 acquisitions and the Chicago Marriott Southwest at Burr Ridge. Somewhat offsetting these increases were $1.3 million of corporate expense in the third quarter of 2005 (the Predecessor did not have a parent-type function) and $0.7 million related to the amortization of stock-based compensation.

Depreciation and Amortization Expense. Total depreciation and amortization expense increased by $2.2 million, or 100.0%, from $2.2 million in the third quarter of 2004 to $4.4 million during the same period in 2005. Virtually all of this increase is related to the depreciation for the Chicago Marriott Southwest at Burr Ridge and the other hotels acquired in 2005. The Company incurred $0.1 million in the accelerated amortization of deferred financing costs relating to the payoff of the mortgage loan for the Embassy Suites Hotel Phoenix/Scottsdale. Also contributing to the increase was $0.3 million on the minority interest partial step-up.

Interest Expense. Total interest expense increased in the third quarter 2005 by approximately $0.2 million, or 6.7%, to $3.2 million from $3.0 million in 2004. The increase is the result of the debt incurred related to the acquisitions of the Embassy Suites Hotel Phoenix/Scottsdale, Hilton Glendale and the Embassy Suites Hotel & Casino San Juan and the $0.1 million of deferred loan fees that were written off as the result of debt refinancing, largely offset by the approximately $76 million of debt that was retired during the fourth quarter of 2004 (including $21.4 million in related-party debt).

Income Tax Benefit. A net income tax benefit of $0.7 million was booked for the three month period ending September 30, 2005. This was the result of an income tax benefit of approximately $0.9 million recognized due to the net loss during the quarter by the TRS. Somewhat offsetting this benefit was an income tax expense of $0.2 million for various state and local income taxes. Due to the ownership structure in place at the time, the Predecessor recorded no income tax benefit during the period ending September 30, 2004.

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As of September 30, 2005, the Company had a deferred tax asset of $2.6 million due to prior and current year losses by the TRS. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.

Minority Interest. Minority interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership. Income is allocated to minority interest based on the weighted average percentage ownership during the quarter. For the three month period ending September 30, 2005, the weighted average percentage of the limited partners’ ownership was 25.7%. As a result of this ownership percentage, the portion of the income earned during the quarter by the Company and allocated to the minority interest was $0.1 million. Due to the ownership structure of the Predecessor, the concept of minority interest did not exist.

Distributions to Preferred Shareholders. During the three month period ended September 30, 2005, the Company made distributions in the amount of the $2.1 million related to the Series A Preferred Shares. These shares were issued as the result of a public offering that closed on June 13, 2005. There were no Preferred Shares issued by the Predecessor, therefore, there were no similar distributions in the prior year.

Net Income Available to Common Shareholders. The net income available to common shareholders of approximately $0.2 million in the third quarter of 2005 represented a decrease of approximately $1.0 million, from the $1.2 million produced in the third quarter of 2004. The decrease was due to the corporate expense, amortization of stock-based compensation, the minority interest allocation, the bad debt expense related to the Chapter 11 filings of Delta Airlines and Northwest Airlines and the preferred share distribution. These decreases were somewhat offset by the net income produced by the acquired hotels, the reduced interest expense, the increased income generated by our existing hotels and the income tax benefit.

Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004

Revenue. Total revenues increased $22.6 million, or 37.0%, from $61.1 million in the first nine months of 2004 to $83.7 million in the first nine months of 2005. $18.1 million of the increase was related to the Chicago Marriott Southwest Hotel at Burr Ridge, which opened in August 2004, and the hotels acquired in 2005. Our remaining hotels all experienced revenue improvements as compared to 2004. These improvements ranged from 2.7% to 22.9%, with the largest improvement seen at the Hilton Cincinnati Airport. The increase at this hotel is largely attributable to the airline and corporate group business. While there has been significant improvement in rate, the main driver for the increase at this property has been occupancy.

For the nine hotels owned in 2004, RevPAR increased from $74.46 to $79.77 for the nine months of 2005, or 7.1%. Aside from the Chicago Marriott Southwest Hotel at Burr Ridge, which opened in August 2004, the largest RevPAR increases occurred at the Hilton Cincinnati Airport (26.7%), the Embassy Suites Hotel Cleveland/Independence (9.8%) and the Hyatt Regency Rochester (9.5%). These RevPAR increases were driven by increases in both occupancy and rate.

Operating Expenses. Total operating expenses increased by $22.8 million, from $49.9 million during the first nine months of 2004, to $72.7 million in the first nine months of 2005, or 45.7%. Of this increase, $14.3 million was related to the Chicago Marriott Southwest at Burr Ridge, which did not open until August 2004, and the hotels acquired in 2005. Also contributing to the increase was $3.6 million and $2.0 million, respectively, for corporate expense (the Predecessor did not have a parent-type function) and amortization of stock-based compensation. Due to revised brand linens standards, there was an increase of approximately $0.2 million incurred in linen purchases in 2005, as compared to 2004. There was $0.2 million in bad debt expense incurred during the period relating to the Chapter 11 filings of Delta Airlines and Northwest Airlines. The remainder of the increase was largely due to items that vary directly with an increase in revenues, such as franchise, management and credit card fees.

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Operating Income. Net operating income decreased by $0.2 million to $11.0 million for the first nine months of 2005 from $11.2 million during the third quarter of 2004. The decrease of 1.8% was the result of $3.6 million of corporate expense incurred in 2005 (the Predecessor did not have a parent-type function) and $2.0 million relating to the amortization of stock-based compensation. There was also increased depreciation expense of $0.9 million at the existing hotels due to the $42.5 million minority interest partial step-up recorded upon formation of the Company on October 1, 2004, related to the acquisition of minority interest from unaffiliated parties in connection with seven of the initial properties. Mostly offsetting these increased expenses was $6.6 million of operating income provided by the Chicago Marriott Southwest at Burr Ridge, which did not open until August 2004, and the hotels acquired in 2005.

Depreciation and Amortization Expense. Total depreciation and amortization expense increased by $3.6 million, or 55%, from $6.6 million for the first nine months of 2004 to $10.2 million during the same period in 2005. $3.2 million, or 91.4%, of the increase is related to the depreciation for the Chicago Marriott Southwest at Burr Ridge and the hotels acquired in 2005. The Company incurred $0.1 million in the accelerated amortization of deferred financing costs relating to the payoff of the mortgage loan for the Embassy Suites Hotel Phoenix/Scottsdale. Also contributing to the increase was $0.9 million on the minority interest partial step-up.

Interest Expense. Total interest expense decreased in the first nine months of 2005 by approximately $1.2 million, or 13.6%, to $7.6 million from $8.8 million in 2004. During the fourth quarter of 2004, approximately $76 million of debt was retired (including $21.4 million in related-party debt), largely resulting in the decrease. To an extent this interest expense decrease was offset by the expense incurred on the loans related to the Embassy Suites Phoenix, Hilton Glendale and the Embassy Suites Hotel & Casino San Juan and the $0.1 million of deferred loan fees that were written off as the result of debt refinancing.

Income Tax Benefit. An income tax benefit of $2.2 million was booked during the nine month period ending September 30, 2005. $2.2 million of this benefit was due to the net loss during the year by the TRS and $0.4 million was the result of the reversal of a prior year deferred tax asset valuation reserve. Providing a slight offset to the tax benefit was $0.4 million of state income tax expense. Due to the ownership structure in place at the time, the Predecessor recorded no income tax benefit during the period ending September 30, 2004.

As of September 30, 2005, the Company had a deferred tax asset of $2.6 million due to prior and current year’s losses by the TRS. Management believes that it is more likely than not that this deferred tax asset will be realized and has determined that no valuation allowance is required.

Minority Interest. Minority interest in the operating partnership represents the limited partners’ proportionate share of the equity in the operating partnership. Income is allocated to minority interest based on the weighted average percentage ownership during the quarter. For the nine month period ending September 30, 2005, the weighted average percentage of the limited partners’ ownership was 25.7%. As a result of this ownership percentage, the portion of the income earned during the quarter by the Company and allocated to the minority interest was $0.9 million. Due to the ownership structure of the Predecessor, the concept of minority interest did not exist.

Distributions to Preferred Shareholders. During the first nine months of 2005, the Company made distributions in the amount of the $2.5 million related to the Series A Preferred Shares. These shares were issued as the result of a public offering that closed on June 13, 2005. There were no Preferred Shares issued by the Predecessor, therefore, there were no similar distributions in the prior year.

Net Income Available to Common Shareholders. The net income available to common shareholders of approximately $2.6 million for the first nine months of 2005 represented an increase of $0.1 million, or 4.0% as compared to $2.5 million generated during the same period for 2004. The increase was due to the net income produced by the acquired hotels, the reduced interest expense, the increased income generated by our existing hotels and the income tax benefit, substantially offset by the corporate expense, amortization of stock-based compensation, the bad debt expense related to the Chapter 11 filings of Delta Airlines and Northwest Airlines, the minority interest allocation and the preferred share distribution.

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NON-GAAP FINANCIAL MEASURES

FUNDS FROM OPERATIONS

The White Paper on Funds From Operations (“FFO”) approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of previously depreciated operating real estate assets and extraordinary items as defined by GAAP, plus certain items such as real estate related depreciation and amortization, and after adjustment for any minority interest deriving from unconsolidated entities and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income. Management believes that the use of FFO, combined with the required primary GAAP presentations, has improved the understanding of operating results of REITs among the investing public and made comparisons of REIT operating results more meaningful. Management considers FFO to be a useful measure of adjusted earnings for reviewing comparative operating and financial performance (although FFO should be reviewed in conjunction with net income (loss), which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the operating performance of a company’s real estate between periods or as compared to different companies.

We compute FFO in accordance with our interpretation of standards established by NAREIT which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the NAREIT definition differently than us. FFO does not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to GAAP net income as an indication of our financial performance or to cash flow from operating activities as determined by GAAP as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. FFO may include funds that may not be available for the Company’s discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties.

The following is a reconciliation between net income and FFO for the three months and nine months ended September 30, 2005 and 2004, respectively (in thousands, except share amounts):

NET INCOME TO FFO RECONCILIATION

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EBITDA

EBITDA herein is defined as net income (loss) before interest expense, taxes, depreciation and amortization. We believe that EBITDA is helpful to investors and management as a measure of the performance of the Company because it provides an indication of the operating performance of the properties within the portfolio and is not impacted by the capital structure of the REIT. EBITDA does not represent cash generated from operating activities as determined by GAAP and should not be considered as an alternative to GAAP net income as an indication of our financial performance or to cash flow from operating activities as determined by GAAP as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions. EBITDA may include funds that may not be available for the Company’s discretionary use due to functional requirements to conserve funds for capital expenditures and property acquisitions, and other commitments and uncertainties.

The following is a reconciliation between net income and EBITDA for the three months and nine months ended September 30, 2005 and 2004, respectively (in thousands):

Key Hotel Operating Statistics

The following table illustrates key operating statistics of our portfolio for the three months and nine months ended September 30, 2005: